5 Stocks to Watch Out for Amid the Omicron Outbreak

A new strain of the Covid-19 virus has been identified in South Africa. It has been named as Omicron by the World Health Organization (WHO).

Preliminary analysis suggests this new variant can transmit quicker than the Delta variant and is also far more infectious. Moreover, it's said, though not confirmed scientifically, the existing vaccines might be less effective against the new variant.

Just when India was recovering from the effects of the second wave, the new variant has added uncertainty. Just this week, the GDP data for the July-September quarter of financial year 2022 showed a growth of 8.4%. This is the fourth consecutive quarter of positive growth after a contraction for two quarters last year.

Analysts are predicting India to hold on to its title of the fastest growing economy in the world until the financial year 2023, given all restrictions are lifted and growth continues to pick up.

But with the new strain emerging, if things get out of control, the government might be forced to bring back the restrictions.

All the core sectors might be affected due to limited activity which in turn will bring down the growth. However, there are few sectors that enjoy relatively higher resistance to another lockdown.

One of them is the healthcare space.

The pandemic has acted as a catalyst of positive change to shape the healthcare sector across the world.

Here are few stocks to watch out for in the healthcare and diagnostic space in India as the new 'variant of concern' spreads.

#1 Cipla

Cipla is a global pharmaceutical company with presence in more than 80 countries with 46 manufacturing plants producing over 1,500 products. Its product portfolio comprises generics and drugs in key therapeutic segments.

In India, Cipla is one of the largest pharmaceutical companies and the largest Indian exporter to emerging markets.

During the pandemic, Cipla rolled out 7 products as a part of their Covid-19 portfolio. These include drugs, sanitisers, and antigen and anti-body testing kits.

Despite the pandemic, it entered into multiple partnerships to market products in oncology, biosimilars, and metabolic ailments.

Cipla saw a strong 12% year on year (YoY) growth in revenue in the financial year 2021 mainly due to respiratory unlocking in the US and their Covid portfolio.

During the same period, Cipla's earnings before interest, tax, and depreciation (EBITDA) margin grew by more than 350 basis points to 22.5% from 18.9%. Lower expenses due to cost optimisation initiatives and lower on ground operations due to lockdown led to expansion in margins.

The company's net profit margin stood at a historic high at 12.6% in financial year 2021 against 9% in financial year 2020. Operational efficiency, and lower finance costs due to prepayment of debt have led to higher net margins.

During the year, the company launched 9 abbreviated new drug applications (ANDA), filed for 8 ANDAs and got approval for 7 ANDAs.

The pandemic has led to the company adopting digital routes to run its business in terms of meeting doctors or organising conferences. This will bring down the costs to a certain extent and hopefully result in better margins for the company.

#2 Dr Lal Pathlabs

Dr Lal Pathlabs is one of the top diagnostic chains in India. It offers more than 5,000 diagnostic tests, related healthcare tests and services across 3,705 centers.

During the pandemic, the company expanded its reach digitally and physically to enhance Covid testing.

Despite the pandemic, the company added 15 labs, 600 collection centers and 2,200 pickup points in financial year 2021.

Dr Lal Pathlabs' revenue grew by 18.9% in financial year 2021 against a 10.6% growth in financial year 2020. The revenue growth was led by a revival in their non-Covid revenues.

The EBITDA margin for the financial year 2021 stood at 29.3% against 27.5% in the previous financial year. A soft margin growth was due to increased costs with respect to logistics and information and technology infrastructure.

The company's net profit grew at 30.3% YoY despite an increase in costs. Net profit margin also came in higher at 18.8% against 17.1% the previous year.

The share of unorganised players in the diagnostic space is very high, leaving a greater scope for organised players like Dr Lal Pathlabs to gain a considerable market share.

#3 Alkem Laboratories

Alkem Laboratories is the fifth largest Indian pharmaceutical company in terms of market share. It has 20 manufacturing facilities and 6 R&D facilities across India and USA. It also exports to more than 40 countries.

The company's product portfolio has more than 800 brands. Of these, 12 brands have annual sales of more than Rs 1 bn.

During the lockdown, the company's operations were slightly impacted. However, it saw a speedy recovery during the unlocking phase.

Alkem Lab's revenues grew 6.2% in financial year 2021 against 13.4% growth in the previous year. Due to a drop in sales of acute therapy prescription medication in India, the company saw lower growth. However, the sales growth was mainly supported by their international business.

The EBITDA margin for financial year 2021 is 21.9%. the margin expanded from 17.72% in the previous year. The margin expansion can be mainly attributed to lower marketing and travel expenses due to lockdown.

Its net profit grew by 40.6% YoY during the year with margins at 17.9%. Lower tax payout due to investing in manufacturing facilities led to growth in profits.

The company sees good growth opportunities as it has filed over 152 ANDAs with the USFDA and received around 110 approvals.

#4 Thyrocare Technologies

Thyrocare is a pan India diagnostic chain that offers more than 279 tests and 79 profiles of tests to detect a number of disorders.

It operates its centralised processing laboratory (CPL) round the clock to cater to the needs of the customers. The company also has a regional processing laboratory (RPL) in metro cities to ensure speedy processing.

Thyrocare has a pan India collection network that it supports through a logistics network and IT infrastructure.

During the pandemic, the company set up zonal processing laboratories (ZPL) for Covid testing and other advanced testing. However, due to the lockdown, some of its collection centers saw a complete shutdown of operations.

The company reported a revenue growth of 14% in financial year 2021 mainly due to an increase in the diagnostic revenue on account of Covid-19 testing.

The EBITDA margin, however, fell to 34.4% against 39.5% the previous year. The company's margin contracted mainly due to increase in expenses.

Overall, the company's net profit grew by 28% YoY. The net profit margin also grew to 22.9% compared to 20.4% the previous year. Lower tax expense led to higher net profit margin.

The company plans to capture the growth of the organised segment in the diagnostics sector and increase its product offerings.

It's also developing cost effective PET-CT scans through its subsidiary and plans to expand this segment.

#5 Morepen Labs

Morepen Labs is a pharmaceutical company in India that manufactures active pharmaceutical ingredients (APIs), generic and branded formulations, and home health and diagnostic products.

It exports its products to more than 80 countries and has market leadership in manufacturing select APIs.

The company's revenue grew 39.6% in the financial year 2021 against 11.7% the previous year. The revenue growth was led by its diagnostics and API business.

During the year, the company maintained its expenses at the same level in the current fiscal. This led to a growth of 67% YoY in EBITDA and a 1.9% YoY improvement in EBITDA margin.

The company's net profit also grew by 189% YoY against a 16% YoY growth in the previous year. The net profit margin stood at 8% against 4% in the financial year 2020.

The diversified product portfolio of the company has helped in growing its revenues despite the pandemic. It plans to expand its operations at the same pace to capitalise on the demand for better healthcare.

In conclusion...

The healthcare and diagnostic industry is just one of several expected to stay resilient to another lockdown.

Of course there could be a near term impact in case concerns escalate and companies need to pivot their plans to deal with it. Sectors such as FMCG, packaging, ecommerce companies could also stay resilient.

The pandemic has changed the way companies do their business. If you plan on investing now, focus on investing in companies that can leverage on the changes in the economy and propel their long term growth prospects.

Do not try to time the market or make hasty decisions. Instead aim to stay invested for a longer horizon as the short-term volatility settles down.

In short, don't be afraid of Omicron. If things do get worse, you will get a great opportunity to buy stocks.

Here's what Research Analyst at Equitymaster, Aditya Vora wrote about positioning your portfolio and minimizing the risk of the latest covid variant.

• Never Buy/Sell stocks based on speculation leading to panic and euphoria. Let the trend settle down.
  
  We don't know what impact the new variant will have on the economy. It's too early to speculate.
  
  In the process, we may not catch the bottom or be able to sell at the top. However, it's much better to ride a trend rather than a falling knife.
  
  While the key to making long-term wealth is to do a bottom up analysis, market positioning and risk management are also important to give you margin of safety.

You can read his entire editorial here: Omicron: How to Position Your Portfolio.

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